Kennedy School Professor Suggests Cutting Fossil Fuel Subsidies

As Congressional lawmakers attempt to hammer out a compromise on federal spending before automatic budget cuts kick in on Friday, Harvard Kennedy School professor Joseph E. Aldy is proposing his own way of reducing the federal budget deficit—eliminating subsidies to the fossil fuel industry.

In a research paper published this month, Aldy suggests that abolishing 12 tax provisions subsidizing fossil fuel production could reduce the federal deficit by as much as $41 billion over the next 10 years.

According to Aldy, a professor of public policy, over $4 billion of tax expenditures are transferred from taxpayers to fossil fuel producers every year.

Aldy’s proposal is one of many papers submitted by experts from the public and private sectors as part of an initiative by the Hamilton Project, a think tank in Washington D.C.

Aldy and others were asked to “provide innovative, pragmatic proposals for lowering the deficit by reducing expenditures of raising revenues,” according to the institution’s website.

In addition to reducing the federal budget deficit, Aldy argues in his paper that the absence of subsidies will reduce fossil fuel producers’ relative business advantage and potentially lower global fuel prices.

“Implementing this proposal will contribute to a leveling of the playing field among oil and gas companies...and will promote the efficiency in allocating capital across the U.S. economy,” wrote Aldy in his paper.

“Removal [of the subsidies] will not materially increase retail fuel prices, reduce employment, or weaken U.S. energy security,” he added.

According to Kennedy School professor and environmental economist Robert N. Stavins, interest groups such as owners of coal and natural gas companies have upheld the subsidies, despite their widely known distortionary effects.

“Subsidies in general are a problem,” Stavins said.

In addition to increasing economic efficiency in the U.S., Aldy said he believes the policy can encourage other countries to phase out their own fossil fuel consumption subsidies—a move that would in turn lower U.S. oil prices.

Stavins affirmed the policy’s global relevance, saying that the largest subsidies are in the world’s large, developing countries such as China and India.

“Developing countries want to keep fuels at low price for the population and direct transfers to low-income people,” Stavins said. “They want to spread the use of energy in the economy.”

—Staff writer Michelle S. Lee can be reached at mlee03@college.harvard.edu.